On Friday, Goldman Sachs hiked its forecast for gold and estimates the metal to hit $2,000 an ounce in a year on low real interest rates, debasement fears and a weakening dollar.
While gold rallied in March, at the height of the COVID-19 fears, it has been struggling for direction since. However, Goldman Sachs in its latest analysts' note updated its three, six and 12-month gold price forecasts to $1,800, $1,900 and $2,000 an ounce from $1,600, $1,650 and $1,800 an ounce and maintained its long December 2020 gold trading recommendation.
Spot gold was up on Friday and trading above $1,740 per ounce. The precious metal had surpassed the $1,700 mark in April but has plateaued somewhat over the past two months as hopes of containment of the pandemic encourage investors to pick riskier assets like equities over the metal. Analysts at Goldman said that the pause in the metal's rally is due to what they call a negative "wealth" shock among emerging market consumers and a positive "fear-driven" investment demand in developed markets.
While India's gold imports plunged by 99 percent in April and May, Russia's central bank ceased buying gold after the recent collapse in oil prices. On the other hand, "fear" about the financial and economic landscape prompted "unprecedented" demand for the yellow metal among investors in developed nations where the volume of gold held by exchange-traded funds (ETFs) was up 20 percent year-on-year so far in 2020.
A combination of risk-on sentiment improving in developed markets as lockdown measures are lifted, and emerging markets likely taking longer to recover, could give cause to expect a correction in gold prices.
"However, as we have argued in the past gold investment demand tends to grow into the early stage of the economic recovery, driven by continued debasement concerns and lower real rates," the note said.
"Simultaneously we see a material comeback from EM consumer demand boosted by easing of lockdowns and a weaker dollar."
Debasement refers to a depreciation in the value of a currency, particularly one based on precious metal such as gold, by introducing additional metal of lesser value. It typically offers more money for government spending while increasing inflation.